Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
It was interesting to see this story was the top one in the NYTimes over the weekend as it focused on a relatively small niche in industrial world, but certainly displays the power a few key players (in this case our investment banks) have over important parcels of our economy. In fact, one could call this power a detriment to the economic process rather than “grease” they claim to be. This won’t be new to old time readers – we discussed it here [June 17, 2011 – WSJ: Wall Street Gets Eyes in Metal Squeeze] and here [Dec 22, 2010: One Trader Holds 80-90% of the LME’s Copper and Aluminum] This is part of a larger conversation of things that are hurting the economy long term – whereas 40 years ago our best and brightest were working on the space program, national infrastructure, private industry engineering and product development… many of those same type of people know work on ways to get around finely worded regulation ala move the exact same aluminum in and out of the same warehouses multiple times a day and charge a fee for it. It’s a worthy story to review, here are a few snippets:
- Hundreds of millions of times a day, thirsty Americans open a can of soda, beer or juice. And every time they do it, they pay a fraction of a penny more because of a shrewd maneuver by Goldman Sachs and other financial players that ultimately costs consumers billions of dollars. The story of how this works begins in 27 industrial warehouses in the Detroit area where a Goldman subsidiary stores customers’ aluminum. Each day, a fleet of trucks shuffles 1,500-pound bars of the metal among the warehouses. Two or three times a day, sometimes more, the drivers make the same circuits. They load in one warehouse. They unload in another. And then they do it again.
- This industrial dance has been choreographed by Goldman to exploit pricing regulations set up by an overseas commodities exchange, an investigation by The New York Times has found. The back-and-forth lengthens the storage time. And that adds many millions a year to the coffers of Goldman, which owns the warehouses and charges rent to store the metal. It also increases prices paid by manufacturers and consumers across the country.
- Only a tenth of a cent or so of an aluminum can’s purchase price can be traced back to the strategy. But multiply that amount by the 90 billion aluminum cans consumed in the United States each year — and add the tons of aluminum used in things like cars, electronics and house siding — and the efforts by Goldman and other financial players has cost American consumers more than $5 billion over the last three years, say former industry executives, analysts and consultants.
- The maneuvering in markets for oil, wheat, cotton, coffee and more have brought billions in profits to investment banks like Goldman, JPMorgan Chase and Morgan Stanley, while forcing consumers to pay more every time they fill up a gas tank, flick on a light switch, open a beer or buy a cellphone.
- Before Goldman bought Metro International three years ago, warehouse customers used to wait an average of six weeks for their purchases to be located, retrieved by forklift and delivered to factories. But now that Goldman owns the company, the wait has grown more than 20-fold — to more than 16 months, according to industry records.
- Aluminum industry analysts say that the lengthy delays at Metro International since Goldman took over are a major reason the premium on all aluminum sold in the spot market has doubled since 2010. The result is an additional cost of about $2 for the 35 pounds of aluminum used to manufacture 1,000 beverage cans, investment analysts say, and about $12 for the 200 pounds of aluminum in the average American-made car. “It’s a totally artificial cost,” said one of them, Jorge Vazquez, managing director at Harbor Aluminum Intelligence, a commodities consulting firm. “It’s a drag on the economy. Everyone pays for it.”
- After a sustained lobbying effort, the Securities and Exchange Commission late last year approved a plan that will allow JPMorgan Chase, Goldman and BlackRock to buy up to 80 percent of the copper available on the market.
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Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/index.php/the-fund/holdings
